If I roll over my private company stock into a Roth IRA, can I make 15 percent of it liquid via a withdrawal?
I am over 59.5 years old. I am having my private company stock retirement rolled over into an IRA to avoid the 20 percent tax. This will be a direct rollover. It seems like a Roth IRA would be the best option here. Once the money arrives in the IRA, I would like to make about 15 percent of it liquid via a withdrawal. Am I allowed to do that since I am over 59.5 years old?
So glad you asked this question. You have a very complex situation that will require more assistance than I can provide here. Please consult with a fee-only financial advisor to help with decision making.
In short, company stock in a 401(k), which I believe you have implied because you mention rolling it over to an IRA, may qualify for special tax treatment. Qualification will need to be determined because you say "private" company stock. Is it a publicly traded stock? That special tax treatment can save you thousands of dollars in taxes if implemented correctly. You also reference "avoid the 20 percent tax." I think you are referring to the 20% withholding if you withdraw retirement funds, but that is only a minimum withholding, the real tax bill, most likely much more, will ultimately get calculated at year-end tax filing.
Also, a direct rollover to an IRA, as you mention would be from a pre-tax account to pre-tax account, which is fine. But then going to a Roth IRA, which is after-tax, would trigger tax on everything upon conversion. This is not recommended. This is the tax you were trying to avoid when you thought it was only 20%. To answer your last question, yes, once funds arrive in an IRA, you may make a withdrawal, but full taxes will be due on the amount withdrawn. The only advantage to being 59.5 is that you do not pay a penalty for an early withdrawal.
Back to the special treatment for the company stock, here are two articles that explain what you are facing in the way of complexities and decisions to be made. Best that you do it with professional assistance. https://www.investopedia.com/investing/rolling-over-company-stock/ https://www.kitces.com/blog/net-unrealized-appreciation-irs-rules-nua-from-401k-and-esop-plans/
Your question leaves a lot of questions unanswered but I'll make a stab at an answer. The Company stock retirement that you refer to sounds like it is in a qualified retirement plan. You can roll it over into an IRA and avoid taxes. The 20 percent tax you are referring to is really just the percentage of taxes that would be held not the amount of tax due. The actual tax rate would be your ordinary tax rate and if that is more than the 20% you will have to pay when you file your return. If it is less than the 20% you would get a refund.
Since the stock retirement plan is before tax, if you were to roll it into a Roth IRA the entire amount of the rollover would be taxed. Roth contributions are always made after-tax. Since you are over 59.5 years of age any amount withdrawn from an IRA account is okay but will be taxed in the year it is withdrawn. You have a lot of moving parts to this and I am sure it is not the only part of your retirement plan. I would encourage you to seek out a “Fee only” independent Registered Investment Adviser (RIA). RIA’s are fiduciaries and will have your best interest at heart. Find one who is a Certified Financial Planner professional ™ (CFP®). You can find advisers at the following websites:
National Association of Personal Financial Advisors - https://www.napfa.org/financial-planning/how-to-find-an-advisor
Financial Planners Association - http://www.plannersearch.org/
Most of the times, Roth conversion is a good strategy to benefit retirees in tax planning. Reading your question, I wasn’t sure what exactly you intended to do. Withdrawal simply means taking money out, but a Roth conversion means you transfer money from a traditional IRA to Roth for the future tax-free withdrawal. Although you must pay tax for both transactions, the latter option via Roth conversion legitimately allows you to hold the investment in a tax shelter account longer without worrying about any future forced withdrawal, the so called RMD (requirement minimum distribution).
Moreover, when make a Roth conversion, it’s ideal not to touch it for a long period of time to make up the cost of the tax you pay upfront. So, if you need to take the money out and use it, no conversion is needed. However, if your intention is to do the Roth conversion and leave it for a long while, make sure you do so correctly. Consultation with a financial planner is recommended because of the tax consequences. Best!